BOJ debated groundwork for future easy-policy exit at Oct meeting

By Leika Kihara

TOKYO (Reuters) -Some Bank of Japan policymakers last month called for the need to start phasing out massive stimulus and lay the groundwork for a future exit from ultra-low interest rates, a summary of opinions at their October meeting showed on Thursday.

The discussions highlight how the BOJ is looking to exit its decade-long accommodative regime, as prospects of sustained inflation and wage growth heighten.

BOJ Governor Kazuo Ueda told parliament on Thursday that companies were becoming more active than before in raising prices and wages, signalling his conviction that Japan was making progress towards hitting the bank’s 2% inflation target.

“We expect trend inflation to gradually approach 2%. But we’d like to wait until we have more conviction that sustained achievement of our price target comes into sight,” Ueda said.

“Until then, we will maintain negative interest rates and the yield curve control framework.”

At the Oct. 30-31 meeting, the BOJ kept its ultra-low interest rate targets unchanged but tweaked the yield curve control (YCC) to loosen its grip on long-term interest rates.

While the BOJ board members saw the move as largely aimed at mitigating the side-effects of YCC, one of them said it would also help in “smoothly proceeding with a normalisation” of monetary policy, according to the summary.

Another opinion showed how one board member saw prospects of sustainably achieving the BOJ’s price target having heightened further since the previous meeting in July.

“It’s therefore necessary for the BOJ to gradually adjust the degree of monetary easing down from its maximum level,” the member was quoted as saying in the summary.

‘WAKE-UP CALL’

The comments highlight a growing view within the central bank that conditions for phasing out massive stimulus were falling in place, reflected in part by a sharp upgrade in the board’s inflation forecasts made at the October meeting.

Some members pointed to broadening corporate price increases and steady increases in service costs, the summary showed.

“It seems that achievement of the BOJ’s price target is coming into sight,” one member said, adding that the second half of fiscal 2023 – which runs from October this year through March next year – would be an “important period” to determine whether the target would be achieved.

Another opinion said the BOJ must lay the groundwork for a future exit by taking steps to improve bond market liquidity, and “offer communication that prepares markets for a world of positive interest rates.”

Naomi Muguruma, senior market economist at Mitsubishi UFJ (NYSE:) Morgan Stanley Securities and a veteran BOJ watcher, said the central bank was likely sending a “wake-up call” to markets that the decades-long era of super low rates was coming to an end.

Former BOJ executive Eiji Maeda also told Reuters that last week’s “surprisingly big” upgrade in its price forecasts meant inflation is already on course to sustainably hit its target.

“There’s a chance the BOJ could end negative rates as early as January next year, if it judges that inflationary pressure is heightening,” he said.

The BOJ remains a dovish outlier amid a global wave of aggressive policy tightening by central banks on the view the recent cost-push inflation must be replaced by a demand-driven price rise before it can phase out stimulus.

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